Australian floods: inflation spike banks make calls on RBA hikes

Basically to support their (banks) massive long carry trade positions on the high yield AUD.

SYDNEY (Dow Jones)--The Australian dollar slid in Asian trading Monday, damped by banking moves in China. Australian bonds also slid on the inflationary concerns, which could force the Reserve Bank of Australia's hand into raising rates. Trading in Asia was partly subdued Monday ahead of the U.S. market shut-down for the Martin Luther King Jr. holiday. Still, after Beijing late Friday said it will raise banks' reserve requirement ratio by 50 basis points, following six hikes last year, many Asian currencies were under pressure, including the Australian dollar. Even with the China move, however, a further sell-off in the Australian dollar this week is unlikely, said Greg Gibbs, head of foreign exchange strategy for RBS in Australia. Among the week's big events, several U.S. companies will post fourth-quarter results, while housing and manufacturing data is due in the U.S. and the U.K., respectively. In addition, European finance ministers will be meeting over the next couple days, with the market anticipating more from them to bolster their response to the ongoing European debt crisis, said Gibbs. "The rates outlook has not changed too much and there are certainly reasons to be quite positive on Australia medium term. I expect buying interest will hold up," around 0.9850, he said. At 0500 GMT, the Australian dollar traded at US$0.9878, down from US$0.9958 late Friday. Against the Japanese yen, the Australian dollar recently changed hands at Y81.875, from Y82.225. Also impacting the Australian market on Monday, an estimate of consumer prices in Australia rose 0.2% in December, pointing to increasing inflationary pressures for the economy, according to a report by TD Securities-Melbourne Institute. The latest rise in the TD-MI monthly inflation gauge continues a string of rising inflation data, after increases of 0.4% in November and 0.3% in October. The report briefly helped the Australian dollar pare some of its decline, while also weighing on Australian bonds. In the rates futures market, the three-year March spot contract lost two ticks to 94.86 while the 10-year contract declined three ticks to 94.44. Westpac strategists noted the inflationary pressures will continue, which would force the country's central bank to hike rates once again. "(Inflation) has clearly bottomed and is starting to accelerate. This is reinforcing our view that the subdued underlying CPI rate of 2.4% (annualized) in the third quarter is likely to be the cycle low," they said.

The RBA should hold off any rates pending the increased borrowing costs for home owners, but with Aust bonds yields paying a premium, it's more likey that any sell off is occuring via newer high yield bonds hitting the market - as government borrowing costs increase from the Queensland flood crisis.

And/or China slowing, commodity markets selling.